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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________________to_________________
Commission file number 001-04668
COASTAL CARIBBEAN OILS & MINERALS, LTD.
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(Exact name of registrant as specified in its charter)
BERMUDA NONE
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Clarendon House
Church Street
Hamilton, Bermuda HM 11
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area cod (441) 295-1422
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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NONE
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.12 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
[ ] Yes [X] No
The aggregate market value of the common stock held by non-affiliates of
the registrant was approximately $6,145,290 (U.S.) at March 10, 2003.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Common stock, par value $.12 per share, 46,211,604 shares outstanding as
of March 10, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
PAGE
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PART I
Risk Factors 4
Item 1. Business 10
Item 2. Properties 15
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 24
PART II
Item 5. Market for the Company's Common Stock and Related
Stockholder Matters 24
Item 6. Selected Consolidated Financial Information 28
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 32
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 53
PART III
Item 10. Directors and Executive Officers of the Company 53
Item 11. Executive Compensation 55
Item 12. Security Ownership of Certain Beneficial Owners and Management 56
Item 13. Certain Relationships and Related Transactions 58
Item 14. Controls and Procedures 60
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K60
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All monetary figures set forth are expressed in United States currency.
3
PART I
RISK FACTORS
An investment in the Company's common stock involves a high degree of
risk. You should carefully consider the following risk factors and other
information in this Form 10-K and the documents incorporated by reference in
evaluating the Company. If any of the following risks actually occur, the
Company's business, financial condition or results of operations could be
materially adversely affected.
RISKS RELATED TO OUR BUSINESS AND THE LITIGATION
WE MAY BE FORCED TO FILE FOR BANKRUPTCY.
The Company's current liabilities exceed its current assets. Certain
creditors of the Company have deferred payment of amounts owed to them. There is
no assurance that those creditors will continue to permit the Company to defer
payments of amounts owed.
The Company has limited funds to continue its operations. Unless the
Company is able to raise adequate additional funds to continue its business, the
Company may be required to file for bankruptcy under the laws of Bermuda within
the next several months.
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FURTHER LOSSES, WHICH COULD
CAUSE US TO DISCONTINUE OUR BUSINESS.
Our business has never had substantial revenues and has operated at a loss
in each year since our inception in 1953. We recorded a loss of $2,448,000 for
the year ended December 31, 2002, a loss of $6,585,000 for the year 2001 and a
loss of $1,386,000 for the year 2000. If we continue to sustain losses and are
unable to achieve profitability, we may not be able to continue our business and
may have to curtail, suspend or cease operations. You should also see Note 1 to
our financial statements regarding the uncertainty as to our ability to continue
as a going concern.
During the three years ended December 31, 2002, we spent approximately
$3,853,000 on legal expenses primarily for the lawsuits against the State of
Florida relating to drilling permits and royalty interests. If we continue to
incur significant expenses and are unable to raise additional funds to meet
these expenses, we may have to cease or suspend our lawsuits and/or cease
operations entirely.
In the unlikely event that we were to receive drilling permits related to
the St. George Island prospect or other exploratory wells, we would be required
to incur a significant amount of operating expenditures to commence drilling
operations and would need to generate significant revenues to achieve
profitability. We may not be
4
able to achieve or sustain revenues, profitability or positive cash flow and
cannot assure that profitability, if achieved, will be sustained.
OUR AUDITORS HAVE EXPRESSED THE VIEW THAT OUR NEGATIVE WORKING CAPITAL,
STOCKHOLDERS' DEFICIT AND CAPITAL DEFICIENCIES RAISE SUBSTANTIAL DOUBT
ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Our auditors have included an explanatory paragraph in their report for
the year ended December 31, 2002, indicating there is substantial doubt
regarding our ability to continue as a going concern. The financial statements
included elsewhere in this prospectus do not include any adjustments to asset
values or recorded liability amounts that might be required in the event we are
unable to continue as a going concern.
WITHOUT ADDITIONAL FINANCING, WE ONLY HAVE ENOUGH LIQUID ASSETS ON HAND TO
CONTINUE TO OPERATE THE COMPANY FOR PART OF THE YEAR 2003.
We believe that our funds on hand will be sufficient to permit us to
continue to operate through July of 2003. After that time, we may have to
suspend or cease operations unless and until we can secure additional financing.
In 2002 certain of our directors, officers, legal counsel and administrative
consultants agreed to defer the payment of their salaries and fees. At December
31, 2002, the amount of salaries and fees deferred totaled approximately
$1,368,000. We currently do not have any commitments for additional financing.
We may be unable to obtain additional financing in the future on acceptable
terms or at all.
IF ULTIMATELY THE COURTS RULE THAT THE STATE OF FLORIDA MAY DENY US A
PERMIT AND NOT COMPENSATE US FOR THE TAKING OF OUR PROPERTY, WE MAY BE
UNABLE TO CONTINUE OUR BUSINESS.
In the event that the courts determine that the State of Florida is
entitled to deny Coastal Petroleum a permit without compensation, it is likely
that we would be unable to continue our business.
WE MAY BE UNABLE TO RAISE THE ADDITIONAL FINANCING NEEDED TO COVER THE
SUBSTANTIAL LITIGATION COSTS OF PROVING OUR PROPERTIES HAVE BEEN TAKEN AND
THEIR VALUE.
Coastal Petroleum has filed a claim with the Florida Circuit Court that
its property has been taken by the State of Florida, and that Coastal Petroleum
is owed compensation by the State of Florida. We will need to secure additional
financing to cover the costs of this litigation, which we estimate will be
substantial. If we are unable to secure the additional financing adequate to
fund the costs of such litigation for a lengthy period of time, we might not be
able to conclude the litigation and might have to cease the lawsuits against the
State of Florida without any meaningful recovery.
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THE STATE OF FLORIDA HAS FAR GREATER RESOURCES THAN WE DO TO PROSECUTE THE
LITIGATION.
The State of Florida utilizes lawyers from the Florida Attorney General's
Office, the Department of Environmental Protection and at least two private law
firms to represent its interests in the litigation. In the event that our funds
are exhausted before the conclusion of the litigation, we may be unable to
conclude the litigation and might be required to cease business.
IF THE AMOUNT OF MONEY WE RECOVER FROM THE STATE OF FLORIDA IS INADEQUATE
TO COVER OUR COSTS, WE MAY BE FORCED TO CEASE OPERATIONS.
Coastal Petroleum's lawsuits against the State of Florida involve highly
specialized technical engineering and legal judgments. Any recovery that Coastal
Petroleum may receive as a result of a court judgment against the State of
Florida may be insufficient to cover the costs of prosecuting the claims at
trial. If this occurs, we may be forced to cease operations.
COASTAL CARIBBEAN IS CURRENTLY A PASSIVE FOREIGN INVESTMENT COMPANY, OR
PFIC, FOR U. S. FEDERAL INCOME TAX PURPOSES, WHICH COULD RESULT IN
NEGATIVE TAX CONSEQUENCES TO YOU.
If, for any taxable year, our passive income or our assets that produce
passive income exceed levels provided by U.S. law, we would be a "passive
foreign investment company," or PFIC, for U.S. federal income tax purposes. For
the years 1987 through 2002, Coastal Caribbean's passive income and assets that
produce passive income exceeded those levels and for those years Coastal
Caribbean constituted a PFIC. Based upon Coastal Caribbean's current passive
income, it is likely that Coastal Caribbean will be classified as a PFIC in
2003. If Coastal Caribbean is a PFIC for any taxable year, then our U.S.
shareholders potentially would be subject to adverse U.S. tax consequences of
holding and disposing of shares of our common stock for that year and for future
tax years. Any gain from the sale of, and certain distributions with respect to,
shares of our common stock, would cause a U.S. holder to become liable for U.S.
federal income tax under Code section 1291 (the interest charge regime). The tax
is computed by allocating the amount of the gain on the sale or the amount of
the distribution, as the case may be, to each day in the U.S. shareholder's
holding period. To the extent that the amount is allocated to a year, other than
the year of the disposition or distribution, in which the corporation was
treated as a PFIC with respect to the U.S. holder, the income will be taxed as
ordinary income at the highest rate in effect for that year, plus an interest
charge.
Please see a discussion of these consequences below in Item 5. Market for
the Company's Common Stock and Related Stockholder Matters. We encourage you to
consult with a personal tax advisor for advice relating to the potential adverse
tax consequences related to an investment in our common shares.
6
OUR BYE-LAWS CONTAIN PROVISIONS WHICH MAY LIMIT A SHAREHOLDER'S EFFORTS TO
INFLUENCE OUR POLICIES AND PREVENT OR DELAY A CHANGE IN CONTROL OF OUR
COMPANY.
Bye-Law 1 provides that any matter to be voted on at any meeting of
shareholders must be approved not only by a simple majority of the shares voted
at such meeting, but also by a majority of the shareholders present in person or
by proxy and entitled to vote at the meeting. This provision may have the effect
of making it more difficult to take corporate action than customary "one share
one vote" provisions, because it may not be possible to obtain the necessary
majority of both votes. As a consequence, Bye-Law 1 may make it more difficult
that a takeover of the company will be consummated, which could prevent the
company's shareholders from receiving a premium for their shares. In addition,
an owner of a substantial number of shares of our common stock may be unable to
influence our policies and operations through the shareholder voting process
(e.g., to elect directors).
Our Bye-Laws also require the approval of 75% of the voting shareholders
and of the voting shares for the consummation of any business combination (such
as a merger, amalgamation or acquisition proposal) involving our company. This
higher vote requirement may deter business combination proposals which
shareholders may consider favorable.
YOU MAY FACE OBSTACLES TO BRINGING SUIT IN BERMUDA AGAINST OUR OFFICERS
AND DIRECTORS.
We are a Bermuda company and certain of our directors and officers are
residents of Bermuda and are not citizens of the United States. As a result, it
may be difficult for investors to effect service of process on us or on these
directors and officers within the United States or to enforce against these
directors and officers judgments of U.S. courts predicated on the civil
liabilities under the federal securities laws. If investors are unable to bring
such suits, they may be unable to recover a loss on their investment resulting
from any violations of the federal securities laws.
There is no precedent for, and therefore no assurance that, the courts in
Bermuda would enforce civil liabilities, whether in original actions in Bermuda
or in the form of final judgments of U.S. courts, arising under the federal
securities laws against us or the persons signing this report on Form 10-K. In
addition, there is no treaty in effect between the U.S. and Bermuda providing
for the enforcement of civil liabilities and there are grounds upon which
Bermuda Courts may not enforce judgments of U.S. courts. In addition, some
remedies available under the laws of U.S. jurisdictions, including some remedies
available under the U. S. federal securities laws, may not be allowed in Bermuda
courts as contrary to that nation's public policy.
7
WE ARE UNABLE TO PAY DIVIDENDS.
We have never declared or paid dividends on our common stock and do not
anticipate declaring or paying any dividends in the foreseeable future. We plan
to retain any future earnings to reduce our deficit accumulated during the
development stage of $38,443,000 at December 31, 2002 and to finance our
operations.
ANY DIVIDENDS WOULD BE SUBJECT TO A 30% WITHHOLDING TAX.
We are a Bermuda corporation. Bermuda currently imposes no taxes on
corporate income or capital gains realized outside of Bermuda. However, any
dividends we receive from Coastal Petroleum are subject to a 30% United States
withholding tax.
RISKS RELATED TO OUR INDUSTRY
THE STATE OF FLORIDA HAS STATED THAT ITS POLICY IS NOT TO PERMIT OIL AND
GAS DRILLING OFFSHORE FLORIDA AND THE STATE HAS DENIED COASTAL PETROLEUM A
PERMIT WITH RESPECT TO ITS ST. GEORGE'S ISLAND PROSPECT. CONSEQUENTLY, WE
DO NOT BELIEVE THAT THE STATE OF FLORIDA WILL GRANT DRILLING PERMITS TO
COASTAL PETROLEUM WITH RESPECT TO ITS LEASES. IN THE UNLIKELY EVENT THAT
THE STATE EVER DOES GRANT COASTAL PETROLEUM A DRILLING PERMIT, COASTAL
PETROLEUM WOULD HAVE TO CONTEND WITH OTHER RISKS.
After obtaining a state drilling permit, Coastal Petroleum would have to
do the following:
- - obtain a federal permit;
- - finance drilling of the well (including the cost of the recommended
surety), which is currently estimated to cost approximately $5.5 million;
and
- - begin drilling the well within one year of the date the state permit is
issued.
We may be unable to obtain the necessary federal permits or we may be
unable to finance and commence drilling operations in a timely manner.
If we fail to discover and develop sufficient oil and gas reserves, we
would be unable to generate sufficient revenues to cover our costs and might
have to curtail, suspend or cease our business operations.
Drilling activities involve numerous risks, including the risk that no
commercially productive natural gas or oil reservoirs will be discovered. The
cost of drilling, completing and operating wells is often uncertain, and
drilling operations may be curtailed, delayed or canceled as a result of adverse
conditions beyond our control.
8
Poor results from our exploration and drilling activities could prevent us from
developing sufficient oil and gas reserves at a commercially acceptable cost.
COMPLIANCE WITH ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATIONS COULD BE
COSTLY.
Our operations and right to obtain interests in and hold properties or to
conduct our business might be affected to an unpredictable extent by limitations
imposed by the laws and regulations which are now in effect or which might be
adopted by the jurisdictions in which we carry on our business.
Further measures that have been or might be imposed include increased bond
requirements, conservation, proration, curtailment, cessation or other forms of
limiting or controlling production of hydrocarbons or minerals, as well as price
controls or rationing or other similar restrictions. In particular,
environmental control and energy conservation laws and regulations adopted by
federal, state and local authorities may have to be complied with by
leaseholders such as Coastal Petroleum.
WE FACE STRONG COMPETITION FROM LARGER OIL AND GAS COMPANIES THAT MAY
IMPAIR OUR ABILITY TO CARRY ON OPERATIONS.
If we receive the necessary state and federal permits to conduct
operations, we will operate in the highly competitive areas of oil and gas
exploration, development and production. We might not be able to compete with,
or enter into cooperative relationships with, our potential competitors, which
include major integrated oil companies, substantial independent energy
companies, affiliates of major interstate and intrastate pipelines and national
and local gas gatherers. If we were unable to establish and maintain
competitiveness, our business would be threatened.
Many of our competitors possess greater financial, technical and other
resources than we do. Factors which affect our ability to successfully compete
in the marketplace include:
- - the financial resources of our competitors;
- - the availability of alternate fuel sources; and
- - the costs related to the extraction and transportation of oil and gas.
9
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
In this Form 10-K and the documents that we incorporate by reference, we
make statements that relate to our future plans, objectives, expectations and
intentions that involve risks and uncertainties. We have based these statements
on our current expectations and projections about future events. These
statements may be identified by the use of words such as "expect," "anticipate,"
"intend," "plan," "believe" and "estimate" and similar expressions. Any
statements that refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements.
Forward-looking statements necessarily involve risks and uncertainties.
Our actual results could differ materially from those discussed in, or implied
by, these forward-looking statements. Factors that could contribute to such
differences include, but are not limited to, those discussed in the "Risk
Factors" section above and elsewhere in this Form 10-K. The factors set forth in
the Risk Factors section and other cautionary statements made in this Form 10-K
should be read and understood as being applicable to all related forward-looking
statements wherever they appear in this Form 10-K.
All subsequent written and oral forward-looking statements attributable to
us are expressly qualified in their entirety by the cautionary statements. You
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
ITEM 1. BUSINESS
(a) General Development of Business.
Coastal Caribbean Oils & Minerals, Ltd. (Company or Coastal
Caribbean), a Bermuda corporation, has been engaged, through its majority owned
subsidiary, Coastal Petroleum Company (Coastal Petroleum), in the exploration
for oil and gas reserves. At December 31, 2002, Coastal Caribbean's principal
asset was its 59-1/4% interest in its subsidiary Coastal Petroleum. Coastal
Petroleum's principal assets are its nonproducing oil, gas and mineral leases
and royalty interests in the State of Florida. Coastal Petroleum has made no
commercial discoveries on the lands covered by these leases. Between March 1992
and June 2000, Coastal Petroleum attempted to obtain a permit from the State of
Florida to drill an exploration well on its Lease 224-A, offshore Florida. Since
January 2001, Coastal Petroleum has been involved in litigation to obtain
compensation from the State of Florida for the alleged taking by the State of
Coastal Petroleum's Lease 224-A by the denial of a permit to drill on the lease.
On October 8, 2002, after a two week trial the trial court in the takings
litigation orally ruled from the bench that the State's denial of a permit to
drill on Coastal Petroleum's Lease 224-A did not constitute an unlawful taking
of Coastal Petroleum's property. On November 15, 2002, the trial court issued
its Final Judgment that the State's denial of a
10
permit to drill on Coastal Petroleum's Lease 224-A did not constitute an
unlawful taking of Coastal Petroleum's property.
Coastal Petroleum Company filed a notice of appeal of the Final
Judgment to the Florida First District Court of Appeal on November 18, 2002 and
filed its initial appeal brief on January 27, 2003. As of March 10, 2003, the
State has not filed its answer brief.
Coastal Petroleum is the lessee under State of Florida leases
relating to the exploration for and production of oil, gas and minerals on
approximately 3,700,000 acres of submerged lands along the Gulf Coast and under
certain inland lakes and rivers. The leases provide for a working interest in
approximately 1,250,000 acres and a royalty interest in approximately 2,450,000
acres covered by the leases. Coastal Petroleum has made no commercial
discoveries on its leaseholds.
In 1990, the State of Florida enacted legislation that prohibits
drilling or exploration for oil or gas on Florida's offshore acreage. Although
the law does not apply to areas where Coastal Petroleum is entitled to conduct
exploration, the State of Florida has effectively prevented any exploratory
drilling by denying the Company's applications for drilling permits. In
addition, in those areas where Coastal Petroleum has only a royalty interest,
the law also effectively prohibits production of oil and gas, rendering it
impossible for Coastal Petroleum to collect royalties from those areas. During
1998, Coastal Petroleum exhausted its legal remedies in its efforts to obtain
compensation for the drilling prohibition on its royalty interest acreage.
Coastal Petroleum has been involved in various lawsuits for many
years. Coastal Petroleum's current litigation (Florida Litigation) now involves
one basic claim: whether the State's denial of a permit constitutes a taking of
its property. In addition, Coastal Caribbean is a party to one additional action
in which Coastal Caribbean claims that certain of its royalty interests have
been confiscated by the State. During 2002, the Company actively pursued the
Florida Litigation.
On October 6, 1999, the Florida First District Court of Appeal ruled
that the Florida Department of Environmental Protection (DEP) has the authority
to deny Coastal Petroleum's drilling permit for its St. George Island prospect,
provided that Coastal Petroleum receives just compensation for what has been
taken. The State of Florida and certain Florida environmental groups filed on
November 1, 1999 a joint motion for clarification, rehearing, or certification
with respect to that decision, asking the Court of Appeal, among other things,
to clarify that the question of whether there has been a taking of Coastal
Petroleum's leases should be determined in the Circuit Court. On June 26, 2000,
the Court of Appeal denied all of the State's motions and stated that the issue
of whether the denial of a permit constituted a taking was not before the Court.
The Court declined to rule on the merits of the taking issue and stated that the
issue was a matter for the Circuit Court. On January 16, 2001, Coastal Petroleum
filed an inverse condemnation action in the Circuit Court to be compensated for
the value of its
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properties. The cost of the litigation has been substantial and the cost is
expected to be substantial in the future.
See Item 3. "Legal Proceedings" for a more complete discussion of the
litigation.
(b) Financial Information About Industry Segments.
Because the Company has been engaged in only one industry, namely,
oil, gas and mineral exploration and development, this item is not applicable to
the Company. See Item 8 for general financial information concerning the
Company.
(c) Narrative Description of the Business.
Coastal Caribbean was organized in Bermuda on February 14, 1962. The
Company is the successor to Coastal Caribbean Oils, Inc., a Panamanian
corporation organized on January 31, 1953 to be the holding company for Coastal
Petroleum Company.
Coastal Petroleum caused oil and gas exploration to take place on
its leases prior to the beginning of litigation in 1968 but has conducted more
limited exploration since that time. Coastal Petroleum believes all drilling and
exploration obligations imposed by its leases have been satisfied to date. No
commercial oil or gas discoveries have been made on these properties; therefore,
the Company has no proved reserves of oil and gas and has had no production. See
Item 2. "Properties."
(i) Principal Products.
Not applicable.
(ii) Status of Product or Segment.
Not applicable.
(iii) Raw Materials.
Not applicable.
(iv) Patents, Licenses, Franchises and Concessions Held.
See Item 2. "Properties."
The acreage covered by Coastal Petroleum's leases is located
for the most part along offshore areas on the Gulf Coast of Florida and in
submerged and unsubmerged lands under certain bays, inlets, riverbeds and lakes,
of which Lake Okeechobee is the largest. Coastal Petroleum currently makes an
annual lease payment of $59,247 to the State of Florida.
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(v) Seasonality of Business.
The Company's business is not seasonal.
(vi) Working Capital Items.
The majority of the Company's current assets are in the
form of cash and cash equivalents. See Item 8. "Financial Statements and
Supplementary Data."
(vii) Customers.
Not applicable.
(viii) Backlog.
Not applicable.
(ix) Renegotiation of Profits or Termination of Contracts
or Subcontracts at the Election of the Government.
Not applicable.
(x) Competitive Conditions in the Business.
Competition in the oil and gas industry is intense. The
Company must compete with companies which have substantially greater resources
available to them. In addition, the industry as a whole must compete with other
industries in supplying the energy needs of commerce and the general public.
Furthermore, competitive conditions may be substantially affected by energy
legislation which may be adopted in the future.
(xi) Research and Development.
Not applicable.
(xii) Environmental Regulation.
The operations of Coastal Caribbean and its right to obtain
interests in and hold properties or to do business may be affected to an
unpredictable extent by limitations imposed by the laws and regulations which
are now in effect or which may be adopted by the jurisdictions in which the
Company carries on its business. Further measures that have been or might be
imposed include increased bond requirements, conservation, proration,
curtailment, cessation or other forms of limiting or controlling production of
hydrocarbons or minerals, as well as price controls or rationing or other
similar restrictions. In particular, environmental control and energy
conservation laws and
13
regulations adopted by federal, state and local authorities may have to be
complied with by leaseholders such as Coastal Petroleum.
(xiii) Number of Persons Employed by Registrant.
The Company currently has one employee. The Company relies
heavily on consultants for legal, accounting, geological and administrative
services. The Company uses consultants because it believes it is more cost
effective than employing a larger full time staff.
(d) Financial Information About Foreign and Domestic Operations and
Export Sales.
(1) Identifiable Assets.
All of the Company's assets are located in the United
States. See Item 1(a) "General Development of Business."
Since the Company is a development stage company, the
balance of the information required under this paragraph is not applicable to
the Company. See Item 8. "Financial Statements and Supplementary Data."
(2) Risks Attendant to Foreign Operations.
Not applicable.
(3) Data which are not Indicative of Current or Future Operations.
Not applicable.
14
ITEM 2. PROPERTIES
PROPERTIES
The discussion herein relating to the Company's properties is qualified in
its entirety by the discussion in Item. 3 "Legal Proceedings" relating to the
Florida Litigation.
Coastal Petroleum, a Florida corporation, holds certain working interests
in nonproducing oil, gas and mineral leases covering approximately 1,250,000
acres, and a royalty interest in approximately 2,450,000 acres, in and offshore
the State of Florida. No commercial oil or gas discoveries have been made on the
properties covered by these leases and Coastal Petroleum has no proved reserves
of oil or gas and has had no significant production.
In 1941, Arnold Oil Explorations, Inc., renamed Coastal Petroleum Company
in 1947, entered into a contract with the Trustees of the Internal Improvement
Trust Fund of the State of Florida (Trustees), in whom title to publicly owned
lands in the State of Florida, including bottoms of salt and fresh waters, is
irrevocably vested, for the exploration of oil, gas and minerals on such lands.
Pursuant to an option to lease in this contract, the Trustees and Coastal
Petroleum entered into three leases between 1944 and 1946. The acreage covered
by these leases is located for the most part along offshore areas on the Gulf
Coast of Florida and in submerged lands under certain bays, inlets, riverbeds
and lakes, of which Lake Okeechobee is the largest.
In 1968, Coastal Petroleum sued the Secretary of the Army of the United
States in a dispute regarding certain mineral rights. In 1969, as part of that
litigation, the Trustees claimed that the leases were invalid and had been
forfeited. Coastal Petroleum and the Trustees settled their disagreement in
1976.
Under the terms of the 1976 settlement agreement, the two leases (224-A
and 224-B) bordering the Gulf Coast were divided into three areas, each running
the entire length of the coastline from Apalachicola Bay to the Naples area: (1)
The inner area, including rivers, bays, and harbors, extends seaward from the
Florida shoreline a distance of 4.36 statute miles (5,280 feet per statute mile)
into the Gulf, covers approximately 2.25 million acres, and is subject to a
royalty interest payable to Coastal Petroleum. This interest is a 6-1/4% royalty
on the wellhead value of all oil and gas, 25 cents per long ton on sulfur,
receivable in cash or in kind at Coastal Petroleum's option, and a 5% royalty on
production or the market value of other minerals. (2) The middle area, three
statute miles wide and covering more than 800,000 acres, was released by Coastal
Petroleum to the Trustees, and Coastal Petroleum has no further interest in the
area. (3) Coastal Petroleum presently owns a 100% working interest in the
outside area, which extends seaward an additional three statute miles and
borders federal offshore acreage. This area, exceeding 800,000 acres, remains
subject to royalties payable to the State of Florida of 12-1/2% on oil and gas,
$.50 per long ton of sulfur and 10% on other minerals. The Florida legislature
has enacted statutes designed to protect the Big Bend Seagrass Aquatic Preserve,
an area covering approximately one quarter of Coastal Petroleum's working
interest area. However, the legislation and
15
legislative history recognize and preserve Coastal Petroleum's prior rights as
granted by the leases.
Coastal Petroleum retains a 100% working interest in 450,000-acre Lake
Okeechobee which is a part of Lease 248 and which is also subject to royalties
payable to the State of Florida of 12-1/2% on oil and gas, $.50 per long ton of
sulfur and 10% on other minerals. Pursuant to its settlement with the State of
Florida in 1976, Coastal Petroleum agreed not to conduct exploration, drilling
or mining operations on Lake Okeechobee without the prior approval of the State.
As to the balance of this lease, covering approximately 200,000 acres, Coastal
Petroleum retains royalty interests of 6-1/4% on oil, gas and sulfur and 5% on
other minerals.
Under the 1976 settlement agreement with the Trustees, the three leases
have a term of 40 years beginning from January 6, 1976 and require the payment
of an annual rental of $59,247, if oil, gas or minerals are being produced in
economically sustainable quantities at January 6, 2016, these operations will be
allowed to continue until they become uneconomic. Further, the settlement
agreement provides that the drilling requirements shall be governed by Chapter
20680, Laws of Florida, Acts of 1941, and that all other drilling requirements
are waived. Under the 1941 Act, a lessee is required to drill at least one test
well on lands leased in each five-year period under the term of the lease.
Coastal Petroleum believes it is current in fulfilling its drilling
requirements. Drilling requirements of Lease 224-A have been satisfied through
the five year obligation period ended August 2, 2004. The State of Florida has
refused Coastal Petroleum the right to drill on Lease 248 since August 10, 1986.
The following charts reflect the acreage and annual rental obligations
resulting from the 1976 settlement agreement with the Trustees and the
approximate acreage under lease at December 31, 2002:
Current Current Current
Working Royalty Annual
Lease Interest Interest Rental
- ----- --------- --------- -------
224-A and 224-B 800,000 2,250,000 $39,261
248 450,000 200,000 19,986
--------- --------- -------
1,250,000 2,450,000 $59,247
========= ========= =======
Acreage under lease at December 31, 2002
Gross Acres (*) Net Acres (**)
------------------------- -------------------------
Undeveloped Developed Undeveloped Developed
----------- ---------- ---------- ---------
Working interest 1,250,000 -0- 1,250,000 -0-
Royalty interest 2,450,000 -0- 153,125 -0-
--------- ---------- --------- ---------
Total 3,700,000 -0- 1,403,125 -0-
========= ========== ========= =========
- ----------
* A gross acre is an acre in which a working interest is owned.
** A net acre is deemed to exist when the sum of fractional ownership working
interests in gross acres equals one. The number of net acres is the sum of
the fractional working interests owned in gross acres expressed as whole
numbers and fractions thereof.
16
DISCLOSURE CONCERNING OIL AND GAS OPERATIONS.
Since the properties in which the Company has interests are undeveloped
and nonproducing, items 2 through 4 of Securities Exchange Act Industry Guide 2
are not applicable.
(5) Undeveloped Acreage.
The Company's undeveloped acreage as of December 31, 2002 was as follows:
Gross Acres Net Acres
----------- ---------
Working Interest 1,250,000 1,250,000
Royalty Interest 2,450,000 153,125
--------- ---------
Total 3,700,000 1,403,125
========= =========
(6) Drilling Activity.
None
(7) Present Activities.
None
(8) Delivery Commitments.
None
Royalties and Other Interests
In addition to royalties payable to the State of Florida as set forth
above, Coastal Petroleum's leases are subject to several royalties and other
interests. The leases are presently subject to overriding royalties aggregating
1/16 as to oil, gas and sulphur and 13/600ths as to minerals other than oil, gas
and sulphur.
We also have granted to certain officers, directors, counsel and
consultants of Coastal Petroleum and Coastal Caribbean the right to receive a
percentage of the net recoveries from the Florida Litigation. See Item 3. "Legal
Proceedings" and Item 13. "Certain Relationships and Related Transactions."
Mineral Rights
Coastal Petroleum's Leases 224-A, 224-B and 248 were determined by a
Florida State court in 1960 to cover not only oil, gas and sulphur, but also all
other minerals. Subsequent litigation has held that these other minerals do not
embrace certain deposits of shell accumulated on water bottoms which had not yet
become mineral, and that Lake Hancock is not within the area covered by Lease
224-B. Under the 1976 settlement agreement with the State of Florida, Coastal
Petroleum retains a 5% royalty
17
with respect to mineral production. However, it cannot conduct mining operations
in 450,000-acre Lake Okeechobee without the prior approval of the State of
Florida. Although Coastal Petroleum had conducted limited mineral exploration
activities on its leases, the courts during the 1980's limited its rights to
mine minerals. Coastal Petroleum has no independent knowledge of commercial
deposits on its leases. Furthermore, Coastal Petroleum does not anticipate that
the State would allow the open pit mining and heavy industrial activity that
would be necessary to remove any minerals if they were to be present, given the
State's objection to a single bore hole for an exploratory oil and gas well.
ITEM 3. LEGAL PROCEEDINGS
FLORIDA LITIGATION
Coastal Petroleum has been involved in various lawsuits for many years.
Coastal Petroleum's current litigation now involves one basic claim: whether the
State's offshore drilling policy and its denial of a permit constitute a taking
of Coastal Petroleum's property. In addition, Coastal Caribbean is a party to
another action in which Coastal Caribbean claims that certain of its royalty
interests have been confiscated by the State.
DRILLING PERMIT LITIGATION
In 1992, Coastal Petroleum applied to the Florida Department of
Environmental Protection (the "DEP") for a permit to drill an exploratory oil
and gas well off Apalachicola, Florida. The proposed well would be located in an
area included within Lease 224-A. The DEP subsequently denied the application
for issuance of a drilling permit for various reasons and imposed a $1.9 billion
bond. Coastal Petroleum appealed the actions of the DEP to the Florida First
District Court of Appeal ("Court of Appeal"). After two decisions by the Court
of Appeal in favor of Coastal Petroleum, the Florida Supreme Court in July 1996
denied the DEP's petition to review an April 1996 Court of Appeal decision. The
Florida Supreme Court had also refused to review an earlier Court of Appeal
decision.
On August 16, 1996, the DEP notified Coastal Petroleum that it was
prepared to issue the drilling permit subject to Coastal Petroleum publishing a
Notice of Intent to Issue ("Notice") the permit. The Notice allowed interested
parties to request administrative hearings on the permit.
On May 28, 1997, the Oil and Gas Drilling Bill (SB550) was enacted in
Florida. The legislation requires that a surety be based on the projected
cleanup costs and possible natural resource damage associated with offshore
drilling as estimated by the DEP and as established by the Administration
Commission (the "Commission") which is comprised of the Governor of Florida and
the Cabinet. Previously, the required surety was satisfied by a payment of
$4,000 to the Mineral Trust Fund in the first year, with a maximum $30,000 per
year and a payment of $1,500 per well for each subsequent year. On September 9,
1997, the State of Florida set a new surety amount of $4.25 billion as a
precondition for the issuance of the drilling permit.
18
On October 20, 1997, a public hearing on the permit application convened
and concluded on November 6, 1997. The hearing included the Company's appeal of
the $4.25 billion surety requirement. On April 8, 1998, a Florida Administrative
Law Judge recommended that Coastal Petroleum was entitled to a drilling permit
with the requirement of a $225 million surety. On May 13, 1998, the Commission
rejected the $225 million surety and remanded the proceedings to the
Administrative Law Judge with instructions to recalculate the surety amount.
On May 22, 1998, the DEP denied the permit to Coastal Petroleum to drill
an offshore exploration well near St. George's Island. Coastal Petroleum
appealed both the denial of the permit by the DEP and the imposition of the
surety to the Court of Appeal.
On October 6, 1999, the Court of Appeal ruled that the DEP has the
authority to deny Coastal Petroleum's drilling permit for its St. George Island
prospect, provided that Coastal Petroleum receives just compensation for what
has been taken. The State of Florida and certain Florida environmental groups
filed on November 1, 1999 a joint motion for clarification, rehearing, or
certification with respect to that decision, asking the Court of Appeal, among
other things, to clarify that the question of whether there has been a taking of
Coastal Petroleum's leases should be determined in the Circuit Court. On June
26, 2000, the Court of Appeal denied all of the State's motions and stated that
the issue of whether the denial of a permit constituted a "taking" was not
before the Court. The Court declined to rule on the merits of the taking issue
and stated that the issue was a matter for the Circuit Court. On January 16,
2001, Coastal Petroleum Company filed a complaint in the Leon County Circuit
Court, Florida against the State of Florida seeking compensation for the State's
taking of its property rights to explore for oil and gas within its state Lease
224-A.
LEASE TAKING CASE (LEASE 224-A)
On January 16, 2001, Coastal Petroleum filed a complaint in the Leon
County Circuit Court, Florida against the State of Florida seeking compensation
for the State's taking of its property rights to explore for oil and gas within
its state Lease 224-A. The lease encompasses more than 400,000 acres off the
West coast of Florida in the Gulf of Mexico.
Coastal Petroleum claims that the State of Florida has taken Lease 224-A
by denying Coastal Petroleum a permit to drill an offshore exploration well near
St. George Island in the Gulf of Mexico. The history of the litigation between
Coastal Petroleum and the State of Florida relating to the denial of the
drilling permit is set forth under the caption "Drilling Permit Litigation."
Coastal Petroleum maintains that the State has effectively taken Coastal
Petroleum's lease by depriving Coastal Petroleum of all or substantially all of
the economically viable use of its constitutionally protected property.
The State claims that there has been no taking of Coastal Petroleum's
property which justifies compensation. The State asserts several affirmative
defenses, including that:
19
(a) Coastal Petroleum is barred from litigating issues which it has
litigated in prior cases against the State and other parties;
(b) Coastal Petroleum's leases are not constitutionally protected property
which can be the subject of an inverse condemnation claim, relying in part on
earlier litigation;
(c) Coastal Petroleum's claim that its property has been taken is not ripe
for legal consideration because Coastal Petroleum has not applied to drill on
other locations on its leaseholds;
(d) The statute of limitations bars any allegation by Coastal Petroleum
that an action taken by any state entity prior to January 16, 1997 constitutes a
taking of Coastal Petroleum's alleged property interest;
(e) Coastal Petroleum has no right to drill for oil on Lease 224-A which
can be taken because it does not have the permit which it agreed to obtain
pursuant to the 1976 Memorandum of Settlement.
On October 8, 2002, after a two week trial the trial court in the taking
litigation orally ruled from the bench that the State's denial of a permit to
drill on Coastal Petroleum's Lease 224-A did not constitute an unlawful taking
of Coastal Petroleum's property. On November 15, 2002, the trial court issued
its Final Judgment that the State's denial of a permit to drill on Coastal
Petroleum's Lease 224-A did not constitute an unlawful taking of Coastal
Petroleum's property.
Coastal Petroleum Company filed a notice of appeal of the Final Judgment
to the Florida First District Court of Appeal on November 18, 2002 and filed its
initial appeal brief on January 27, 2003. The intervenors (as described below)
joined the appeal of the Final Judgment and appealed the ruling on their motion
to intervene. The intervenors filed their brief on February 10, 2003. As of
March 10, 2003, the State had not filed its answer brief.
On December 13, 2002, the State filed a motion for an order by the trial
court by which the State seeks to recover $178,315 from Coastal Petroleum,
including expert witness fees, deposition costs and copying costs. On December
20, 2002, Coastal Petroleum filed objections and responses to the State's
motion, objecting to the costs and requesting an evidentiary hearing. In the
opinion of Company's litigation counsel, the State's motion for fees and costs
is without merit. As of March 10, 2003, no hearing date has been set on the
State's motion to recover costs. An award of costs by the trial court against
Coastal Petroleum could be appealed by either party. Coastal Petroleum also
would have the right to seek an automatic stay of any cost award rendered
against it pending appeal of the award, by the posting of a bond deemed
sufficient by the trial court.
20
ANCILLARY MATTERS TO LEASE TAKING CASE
On February 13, 2001, certain holders of royalties pertaining to Lease
224-A filed a Motion to Intervene as Additional Plaintiffs. On April 24, 2001,
the Leon County Circuit trial judge granted certain royalty holders with
overriding royalties, which aggregate approximately 4% on State Lease 224-A, the
right to intervene on a limited basis in the takings lawsuit. On May 22, 2001,
the royalty holders appealed the Circuit Court's order granting them limited
intervention to the First District Court of Appeal, claiming the order denied
them the right to fully participate in the case until after final judgment and
that the court erroneously found that the royalty holders lack an ownership
interest in Coastal Petroleum's lease. On June 12, 2001, the Court of Appeal
ordered the royalty holders to show cause why the appeal should not be dismissed
for lack of jurisdiction. The royalty holders filed a response to the Court of
Appeal on June 21, 2001, Coastal Petroleum filed its reply on July 2, 2001 and
the State of Florida filed its reply on July 5, 2001. The Court of Appeal
dismissed the appeal without jurisdiction on March 28, 2002.
Counsel for the appealing royalty holders has advised Coastal Petroleum
that the royalty holders' position is that their interest is worth substantially
more than 4% of whatever judgment may be awarded to Coastal Petroleum in the
litigation and that they intend to make a claim against any recovery Coastal
Petroleum may obtain in the litigation. Coastal Petroleum has informed the
Circuit Court and counsel for the royalty holders that Coastal Petroleum is not
making any claim in the litigation on behalf of any interest the royalty holders
may have.
NO ASSURANCES
There is no assurance that Coastal Petroleum will be successful on the
merits of its claims, which the State of Florida is vigorously defending. There
is also no assurance that Coastal Petroleum will receive a ruling that its Lease
224-A has been taken or that if compensation is awarded it will be awarded in
the amount sought by Coastal Petroleum.
OTHER PERMIT APPLICATIONS
On February 25, 1997 Coastal Petroleum filed 12 additional applications
for drilling permits. Coastal Petroleum objected to certain requests for
additional data by the Florida DEP. On March 26, 1999, an administrative law
judge upheld the DEP's requirements. The First District Court of Appeal affirmed
the decision of the administrative law judge on February 29, 2000.
In order to more fully permit the Apalachicola Reef Play, which includes
the St. George Island prospect, on October 29, 1998, Coastal Petroleum filed
four additional permit applications (1310-1313). The DEP also requested
additional data for these applications. As of March 10, 2003, Coastal Petroleum
had not yet submitted the requested data. Although these applications are still
pending, Coastal Petroleum does not believe the DEP will ever grant these
permits.
21
COASTAL CARIBBEAN ROYALTY LITIGATION
The offshore areas covered by Coastal Petroleum's original leases (prior
to the 1976 Settlement Agreement) are subject to certain other royalty interests
held by third parties, including Coastal Caribbean. On April 20, 1994, several
of those third parties, including Coastal Caribbean, which has approximately a
12% interest in any recovery, have instituted a separate lawsuit against the
State of Florida in the 5th Judicial Circuit in Hernando County. That lawsuit
claims that the royalty holders' interests have been confiscated as a result of
the State's actions discussed above and that they are entitled to compensation
for that taking. The royalty holders were not parties to the 1976 Settlement
Agreement, and the royalty holders contend that the terms of the Settlement
Agreement do not protect the State from taking claims by those royalty holders.
The case was subsequently transferred to the 2nd Judicial Circuit in Leon County
and it is currently pending before the Circuit Court in Tallahassee. On December
2, 1999, the Circuit Court denied the State's motion to dismiss the plaintiffs'
claim of inverse condemnation but dismissed several other claims.
On May 10, 2000, the State filed a motion for summary judgment but no
hearing date has been set for the motion. Discovery is proceeding.
Any recovery made in the royalty holders' lawsuit would be shared among
the various plaintiffs in that lawsuit, including Coastal Caribbean, but not
Coastal Petroleum.
LEASE TAKING CASE (LEASE 224-B)
On May 21, 2002, Coastal Petroleum filed a complaint in the Leon County
Circuit Court, Florida against the State of Florida seeking compensation for the
State's alleged taking of its property rights to explore for oil and gas within
its State Lease 224-B. The lease encompasses more than 400,000 acres off the
West Coast of Florida in the Gulf of Mexico. On July 22, 2002, a motion by the
State of Florida to dismiss the case was heard. The court denied the State's
motion to dismiss the case on August 30, 2002. The case is currently pending and
is in the discovery stage.
COUNSEL
The Tampa, Florida law firm of Gaylord Merlin Ludovici Diaz & Bain was
Coastal Petroleum's principal trial counsel in Coastal Petroleum's inverse
condemnation claim against the State of Florida in Florida Circuit Court. Mr.
Cary Gaylord was the lead attorney for Gaylord Merlin. Mr. Gaylord, age 55, has
extensive experience in eminent domain and property rights matters. He is a 1969
graduate of the United States Military Academy and a 1974 graduate of the
University of Florida Law School.
In addition, Mr. Robert J. Angerer of the law firm of Angerer & Angerer
of Tallahassee, Florida assisted Gaylord Merlin in the litigation. Mr. Angerer,
age 55, is a 1969 graduate of the University of Michigan and received his law
degree with high honors from Florida State University in 1974. Mr. Angerer was
elected a member of the Board of Directors of Coastal Caribbean and of Coastal
Petroleum on January 30, 2003 and a Vice President of Coastal Caribbean and
Coastal Petroleum on February 28, 2003. Angerer &
22
Angerer is the principal counsel in the appeal of the Taking Case (Lease 224-A)
and the principal trial counsel in Coastal Petroleum's inverse condemnation
claim regarding Lease 224-B.
STATUTORY ATTORNEYS' FEES
Chapter 73 of Florida law provides in eminent domain proceedings (which
would include Coastal Petroleum's taking claim) that, in addition to the award
made to the property owner, the court shall award attorneys' fees based on the
difference between the final judgment or settlement and the first written offer
made to the property owner by the State in accordance with the following
schedule:
1. Thirty-three percent of any difference up to $250,000; plus
2. Twenty-five percent of any portion of the difference between $250,000
and $1 million; plus
3. Twenty percent of any portion of the difference exceeding $1 million.
CONTINGENCY FEES
In 1990, Coastal Petroleum considered that the following firms or
individuals were important to the success of the litigation against the State of
Florida and agreed to pay them an aggregate of 8.65% in contingent fees based on
any net recovery from execution on or satisfaction of judgment or from
settlement of the Florida litigation:
Relationship to
Coastal Petroleum Net Recovery
Holder at Date of Grant Percentage
--------------------------- ---------------------------- -------------
Reasoner, Davis & Fox Special Counsel 2.00
Robert J. Angerer Litigation Counsel 1.50
Benjamin W. Heath Chairman of the Board 1.25
Phillip W. Ware President 1.25
Murtha Cullina LLP Securities Counsel to 1.00
Coastal Caribbean
Ausley & McMullen, P.A. (*) Special Counsel .75
James R. Joyce Assistant Treasurer .30
Arthur B. O'Donnell Vice President/Treasurer .30
James J. Gaughran Secretary .30
----
Total 8.65
====
(*) Interest was granted in 1996.
In addition, Coastal Petroleum has agreed to pay Gaylord Merlin a
contingent fee in connection with compensation awarded to Coastal Petroleum for
the taking of Lease 224-A, Lease 224-B and Lease 248 equal to the greater of:
(a) approximately 90% of the statutory award of attorneys' fees
(discussed above), less the hourly fees paid to Gaylord Merlin, or
23
(b) ten percent of the first $100 million or portion thereof of the
compensation received by Coastal Petroleum from the State as compensation for
the taking of its property, plus five percent of such compensation in excess of
$100 million, less
(i) the hourly fees paid to Gaylord Merlin and
(ii) other costs of the litigation as follows:
(a) if compensation to Coastal Petroleum is less than
$55 million, there shall be no deduction of other
costs;
(b) if compensation to Coastal Petroleum is equal to
or greater than $55 million, then for each $5
million increase there shall be a deduction of
$200,000 of other costs up to $100 million;
(c) for each $5 million increase in compensation to
Coastal Petroleum over $100 million up to total
compensation of $160 million, there shall be a
deduction of $100,000 of other costs; and
(d) for compensation to Coastal Petroleum over $160
million, there shall be a deduction of all costs
of the litigation which are not recovered from the
State (which shall not include any fees of Mr.
Angerer or Mr. Aurell).
UNCERTAINTY
Coastal Petroleum and/or Coastal Caribbean may not prevail on any of the
issues set forth above and may not recover compensation for any of their claims.
In addition, even if Coastal Petroleum were to prevail on any or all of the
issues to be decided, Coastal Caribbean or Coastal Petroleum may not have
sufficient financial resources to survive until such decisions become final. In
the unlikely event that the State of Florida were to grant a permit to drill any
wells for which applications have been filed, the wells drilled may not be
successful and may not lead to production of any oil or gas in commercial
quantities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
(A) MARKET INFORMATION.
The principal market for the Company's common stock is in the
over-the-counter market on the "Electronic Bulletin Board" of the National
Association of Securities
24
Dealers, Inc. under the symbol COCBF.OB. The quarterly high and low closing
prices on the Electronic Bulletin Board during the last two years were as
follows:
On February 13, 2003, Coastal Caribbean' shares of common stock were
delisted from trading on the Boston Stock Exchange because the Company's
shareholders' equity was less than the $1,000,000 minimum amount required by the
Exchange.
2001 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- ---- ----------- ----------- ----------- -----------
High 1.81 1.75 1.32 1.05
Low .85 .90 .85 .80
2002 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- ---- ----------- ----------- ----------- -----------
High 1.02 .91 .96 .70
Low .76 .57 .42 .16
(B) HOLDERS.
The approximate number of record holders of the Company's common stock
at February 20, 2003 was 8,200.
(C) DIVIDENDS.
The Company has never declared or paid dividends on its common stock and
it does not anticipate declaring or paying any dividends in the foreseeable
future. The Company plans to retain any future earnings to reduce the deficit
accumulated during the development stage of $38,443,111 at December 31, 2002 and
to finance its operations.
The Company's Memorandum of Association and Bye-laws do not permit the
Company to repurchase or redeem shares of its common stock.
Foreign Exchange Control Regulations
The Company is subject to the applicable laws of The Islands of Bermuda
relating to exchange control, but has the permission of the Foreign Exchange
Control of Bermuda to carry on business in, to receive, disburse and hold United
States dollars and dollar securities under its designation as an External
Account Company. The Company has been advised that, although as a matter of law
it is possible for such designation to be revoked, there is little precedent for
revocation under Bermuda law.
25
Income and Withholding Taxes
Coastal Caribbean is a Bermuda corporation. Bermuda currently imposes no
taxes on corporate income or capital gains realized outside of Bermuda. Any
amounts received by Coastal Caribbean from United States sources as dividends,
interest, or other fixed or determinable annual or periodic gains, profits and
income, will be subject to a 30% United States withholding tax. In addition, any
dividends from its domestic subsidiary, Coastal Petroleum, will not be eligible
for the 100% dividends received deduction, which is allowable in the case of a
United States parent corporation. Shares of the Company held by persons who are
citizens or residents of the United States are subject to federal estate and
gift and local inheritance taxation. Any dividends received by such persons will
also be subject to federal, State and local income taxation. The foregoing rules
are of general application only, and reflect law in force as of the date of this
report.
A convention between Bermuda and the United States relating to mutual
assistance on tax matters became operative in 1988.
Passive Foreign Investment Company Rules
The Internal Revenue Code of 1986, as amended, provides special rules
for distributions received by U.S. holders on stock of a passive foreign
investment company (PFIC), as well as amounts received from the sale or other
disposition of PFIC stock.
Under the PFIC rules, a non-U.S. corporation will be classified as a
PFIC for U.S. federal income tax purposes in any taxable year in which, after
applying certain look-through rules, either (1) at least 75 percent of its gross
income is passive income or (2) at least 50 percent of the gross value of its
assets is attributable to assets that produce passive income or are held for the
production of passive income.
Passive income for this purpose generally includes dividends, interest,
royalties, rents, and gains from commodities and securities transactions.
Special rules apply in cases where a foreign corporation owns directly or
indirectly at least a 25 percent interest in a subsidiary, measured by value. In
this case, the foreign corporation is treated as holding its proportionate share
of the assets of the subsidiary and receiving directly its proportionate share
of the income of the subsidiary when determining whether it is a PFIC. Thus,
Coastal Caribbean would be deemed to receive its pro rata share of the income
and to hold its pro rata share of the assets, of Coastal Petroleum.
Based on certain estimates of its gross income and gross assets and the
nature of its business, Coastal Caribbean would be classified as a PFIC for the
years 1987 through 2002. Once an entity is considered a PFIC for a taxable year,
it will be treated as such for all subsequent years with respect to owners
holding the stock in a year that it was classified as a PFIC under the income or
asset test described above. Whether the Company will be a PFIC under either of
these tests in future years will be difficult to determine because the tests are
applied annually. Based upon Coastal Caribbean's
26
current passive income, it is likely that Coastal Caribbean will be classified
as a PFIC in 2003.
If Coastal Caribbean is classified as a PFIC with respect to a U.S.
holder any gain from the sale of, and certain distributions with respect to,
shares of our common stock, would cause a U.S. holder to become liable for U.S.
federal income tax under Code section 1291 (the interest charge regime). The tax
is computed by allocating the amount of the gain on the sale or the amount of
the distribution, as the case may be, to each day in the U.S. shareholder's
holding period. To the extent that the amount is allocated to a year, other than
the year of the disposition or distribution, in which the corporation was
treated as a PFIC with respect to the U.S. holder, the income will be taxed as
ordinary income at the highest rate in effect for that year, plus an interest
charge. The interest charge would generally be calculated as if the distribution
or gain had been recognized ratably over the U.S. holder's holding period (for
PFIC purposes) for the shares. To the extent an amount is allocated to the year
of the disposition or distribution, or to a year before the first year in which
the corporation qualified as a PFIC, the amount so allocated is included as
additional gross income for the year of the disposition or distribution. A U.S.
holder also would be required to make an annual return on IRS Form 8621 that
describes any distributions received with respect to our shares and any gain
realized on the sale or other disposition of our shares.
As an alternative to taxation under the interest charge regime, a U.S.
holder generally can elect, subject to certain limitations, to annually take
into gross income the appreciation or depreciation in our common shares' value
during the tax year (mark-to-market election). If a U.S. holder makes the
mark-to-market election, the U.S. holder will not be subject to the
above-described rule. Instead, if a U.S. holder makes the mark-to-market
election, the U.S. holder recognizes each year an amount equal to the difference
as of the close of the taxable year between the U.S. holder's fair market value
of the common shares and the adjusted basis in the common shares. Losses would
be allowed only to the extent of net gain previously included by the U.S. holder
under the mark-to-market election for prior taxable years. Amounts included in
or deducted from income under the mark-to-market election and actual gains and
losses realized upon the sale or disposition of the common shares, subject to
certain limitations, will be treated as ordinary gains or losses. If the
mark-to-market election is made for a year other than the first year in the U.S.
holder's holding period in which the corporation was a PFIC, the first year's
mark-to-market inclusion, if any, is taxed as if it were a distribution subject
to the interest charge regime discussed above.
Another alternative election which would allow a U.S. holder to elect to
take its pro rata share of Coastal Caribbean's undistributed income into gross
income as it is earned by Coastal Caribbean (QEF election) would only be
available to a U.S. holder if Coastal Caribbean provided certain information to
the shareholders of Coastal Caribbean. Coastal Caribbean has had no
undistributed income for the years 1987 through 2002. If the QEF election is
made in a year other than the first year of the U.S. holder's holding period in
which the foreign corporation is a PFIC, both the QEF regime and interest charge
regime can apply, unless a special election is made. Under this special
election, the taxpayer is treated as if it disposed of its PFIC stock in a
transaction subject to the interest charge rules to the extent gain is deemed to
be
27
recognized. Once this election is made, the holder will be subject only to the
QEF regime.
Recent Sales of Unregistered Securities
None
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial information (in thousands
except for per share amounts) for the Company insofar as it relates to each of
the five years in the period ended December 31, 2002 has been extracted from the
Company's consolidated financial statements.
Years ended December 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
($) ($) ($) ($) ($)
-------- -------- -------- -------- --------
Net loss (2,448) (6,585) (1,386) (1,105) (1,155)
======= ======= ======= ======= =======
Net loss per share (basic and diluted) (.05) (.15) (.03) (.03) (.03)
======= ======= ======= ======= =======
Cash and cash equivalents
and marketable 292 609 2,959 1,042 2,181
======= ======= ======= ======= =======
securities
Unproved oil, gas and,
mineral properties -- -- 4,145 4,097 4,073
======= ======= ======= ======= =======
(full cost method)
Total assets 707 1,077 7,497 5,544 6,648
======= ======= ======= ======= =======
Shareholders' equity:
Common stock 5,545 5,216 5,216 4,807 4,807
Capital in excess of par value 32,068 31,498 31,498 28,693 28,693
Deficit accumulated during
the development stage (38,443) (35,996) (29,410) (28,025) (26,919)
------- ------- ------- ------- -------
Total shareholders' (deficit) equity (830) 718 7,304 5,475 6,581
======= ======= ======= ======= =======
Common stock shares outstanding (weighted average) 44,734 43,468 40,844 40,056 40,056
======= ======= ======= ======= =======
As more fully described in Notes 1 and 4 to the consolidated financial
statements, we have a working capital deficiency, have incurred recurring losses
and have a deficit accumulated during the development stage. We have been and
continue to be involved in several legal proceedings against the State of
Florida which have limited our ability to commence development activities on our
unproved oil and gas properties or obtain compensation for certain property
rights we believe have been taken. These situations raise substantial doubt
about our ability to continue as a going concern. Our consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or amounts and classification
of liabilities which may result from the outcome of this uncertainty.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature are
intended to be forward looking statements. The Company cautions readers that
forward looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those indicated in the
forward looking statements. For a discussion of certain risk factors affecting
the Company, please see "Risk Factors" above.
Critical Accounting Policies
The Company follows the full cost method of accounting for its oil and
gas properties. All costs associated with property acquisition, exploration and
development activities whether successful or unsuccessful are capitalized. Since
the Company's properties were undeveloped and nonproducing and the subject of
litigation, capitalized costs were not being amortized, however, as more fully
described in Note 3, these costs were written off in 2001.
The capitalized costs are subject to a ceiling test which basically
limits such costs to the aggregate of the estimated present value discounted at
a 10% rate of future net revenues from proved reserves, based on current
economic and operating conditions, plus the lower of cost or fair market value
of unproved properties. The Company assesses whether its unproved properties are
impaired on a periodic basis. This assessment is based upon work completed on
the properties to date, the expiration date of its leases and technical data
from the properties and adjacent areas. These properties are subject to
extensive litigation with the State of Florida.
During the year 2001, the Company concluded that its leases had been
taken and its property interests were impaired by the actions taken by the State
of Florida and therefore, had recorded an impairment charge to reflect the write
off of the costs of unproved oil, gas and minerals properties. See Note 4.
Litigation. All costs incurred in 2002 in connection with the Company's Florida
leases have been expensed as incurred (as will be all future costs).
(1) LIQUIDITY AND CAPITAL RESOURCES
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature are
forward looking statements. The Company cautions readers that forward looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward looking
statements. Among the risks and uncertainties are:
1. the uncertainty of any decision favorable to Coastal Petroleum in its
litigation against the State of Florida;
29
2. the substantial cost of continuing the litigation;
As more fully described in Notes 1 and 4 to the consolidated financial
statements, we have a working capital deficiency, have incurred recurring losses
and have a deficit accumulated during the development stage. We have been and
continue to be involved in several legal proceedings against the State of
Florida which has limited our ability to commence development activities on our
unproved oil and gas properties or obtain compensation for certain property
rights we believe have been taken. These situations raise substantial doubt
about our ability to continue as a going concern. Our consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or amounts and classification
of liabilities which may result from the outcome of this uncertainty.
LIQUIDITY
In July 2002 Coastal Caribbean concluded a rights offering and sold
2,743,275 shares of common stock for $.50 per share and received net proceeds of
approximately $900,000.
At December 31, 2002, Coastal Caribbean had approximately $292,000 of
cash and cash equivalents available. Management believes that this amount should
be sufficient to fund the Company's operations through July 2003, provided that
payments to the Company's litigation counsel and to the Company's salaried
employee are deferred and provided further that payments to other Company
counsel are also deferred. In addition, an estimated amount of approximately
$185,000 would be necessary to fund the Company's operations through December
31, 2003, assuming these deferrals continue. This amount would be approximately
$650,000 if such deferrals do not continue. After July 2003, the Company may
have to suspend or cease operations and may have to file for bankruptcy under
the laws of Bermuda unless and until the Company can secure additional
financing. The Company's current cash and cash equivalents are expected to be
used for general corporate purposes, including lease rental payments of
approximately $59,000 in July 2003 and to continue the litigation against the
State of Florida.
Certain directors, officers, legal counsel and administrative
consultants have agreed to defer the payment of their salaries and fees. At
December 31, 2002, the amount of salaries and fees being deferred totaled
approximately $1,368,000.
Coastal Caribbean has a working capital deficiency, has a limited amount
of cash and cash equivalents, has incurred recurring losses and has a deficit
accumulated during the development stage. On January 16, 2001, Coastal Petroleum
filed a complaint in the Leon County Circuit Court in Florida against the State
of Florida seeking compensation for the State's taking of its property rights to
explore for oil and gas within its Lease 224-A. On November 15, 2002, the Trial
Court issued its Final Judgment that the State's denial of a permit to drill on
Coastal Petroleum's Lease 224-A did not constitute an unlawful taking of Coastal
Petroleum's property. The cost of that litigation has been substantial and will
require the Company to obtain additional capital.
30
Since October 2002, Coastal Caribbean and Coastal Petroleum have
attempted to raise funds from the other shareholders of Coastal Petroleum and
from others. With the exception of the sale subsequent to year end by Coastal
Petroleum of two shares of its common stock for $25,000 per share to a
non-shareholder of Coastal Petroleum and non-binding indications of interest in
purchasing shares from Coastal Petroleum by other potential purchasers, those
efforts have been unsuccessful.
(2) RESULTS OF OPERATIONS
The Company, a development stage enterprise, has never had substantial
revenues and has operated at a loss each year since its inception in 1953.
During the three years ended December 31, 2002, the Company spent approximately
$3,853,000 on legal expenses primarily for the lawsuits against the State of
Florida relating to drilling permits and royalty interests.
2002 VS. 2001
THE COMPANY INCURRED A LOSS OF $2,488,000 for the year 2002, compared to
a loss of $6,585,000 for the year 2001.
INTEREST INCOME AND OTHER INCOME DECREASED 91% from $78,000 in 2001 to
$7,000 in 2002 because less funds were available for investment and lower
interest rates.
LEGAL FEES AND COSTS DECREASED 7% to $1,549,000 for 2002 from $1,670,000
in 2001. Legal fees and costs decreased in 2002 as compared with 2001 due to a
reduction in expenditures for legal and geological experts consulted in
preparation for the trial of the Company's lawsuit against the State of Florida
seeking compensation for the State's alleged taking of its property rights to
explore for oil and gas within its state Lease 224-A. This reduction was
partially offset by an increase in costs incurred for legal services directly
connected with the trial which took place in September 2002. The Company expects
that the cost of the litigation will continue to be substantial.
ADMINISTRATIVE EXPENSES INCREASED 24% IN 2002 to $662,000 from $534,000
in 2001 primarily because of a $72,000 increase in the cost of liability
insurance. Also, Accounting and Administrative costs increased because of
additional services required in connection with the Florida Litigation.
SALARIES DID NOT CHANGE during the periods and remained at $152,000 in
2002.
SHAREHOLDER COMMUNICATIONS costs decreased to $32,000 in 2002 compared
to $106,000 in 2001 because there was no annual meeting of shareholders held in
2002.
WRITE OFF OF UNPROVED PROPERTIES TOTALED $59,000 IN 2002 COMPARED TO
$4,202,000 IN 2001. During the year 2001, the Company concluded that the value
of its leases had been taken and its property interests had been impaired by
actions taken by the State of Florida and therefore, had recorded an impairment
charge to reflect the write off of these costs. All costs incurred in 2002 in
connection with the Company's Florida leases have been and all future costs will
be expensed as incurred.
31
2001 VS. 2000
THE COMPANY INCURRED A LOSS OF $6,585,000 for the year 2001, compared to
a loss of $1,386,000 for the year 2000.
INTEREST INCOME AND OTHER INCOME INCREASED 24% from $63,000 in 2000 to
$78,000 in 2001 because of the funds realized and invested from the October 2000
sale of common stock to the Company's shareholders.
LEGAL FEES AND COSTS INCREASED 164% to $1,670,000 for 2001 from $634,000
in 2000. Legal fees and costs increased in 2001 in connection with Coastal
Petroleum Company's lawsuit against the State of Florida seeking compensation
for the State's alleged taking of its property rights to explore for oil and gas
within its state Lease 224-A. The Company expects that the cost of the
litigation will be substantial.
ADMINISTRATIVE EXPENSES DECREASED IN 2001 to $534,000 from $535,000 in
2000.
SALARIES DID NOT CHANGE during the periods and remained at $152,000 in
2001.
SHAREHOLDER COMMUNICATIONS costs decreased slightly to $106,000 in 2001
compared to $108,000 in 2000.
EXPLORATION COSTS DECREASED FROM $20,000 in 2000 to $500 in 2001 because
of the State of Florida's denial of the Company's application for a permit to
drill on Lease 224-A. In 2000, Coastal Petroleum incurred expenses associated
with drilling permit applications in connection with shallow test wells to
comply with Coastal Petroleum's drilling obligations.
WRITE OFF OF UNPROVED PROPERTIES TOTALED $4,202,000 IN 2001. During the
year 2001, the Company concluded that the value of its leases has been taken and
its property interests were impaired by the actions taken by the State of
Florida and therefore, has recorded an impairment charge to reflect the write
off of these costs. All future costs incurred in connection with the Company's
Florida leases will be expensed as incurred.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not have any significant exposure to market risk as the
only market risk sensitive instruments are its investments in marketable
securities. At December 31, 2002, the carrying value of such investments
(including those classified as cash and cash equivalents) was approximately
$199,000, the fair value was $199,000 and the face value was $200,000. Since the
Company expects to hold the investments to maturity, the maturity value should
be realized.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Coastal Caribbean Oils & Minerals, Ltd.
We have audited the accompanying consolidated balance sheets of Coastal
Caribbean Oils & Minerals, Ltd. (a development stage company) as of December 31,
2002 and 2001, and the related consolidated statements of operations, cash
flows, and common stock and capital in excess of par value for each of the three
years in the period ended December 31, 2002 and for the period from January 31,
1953 (inception) to December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Coastal
Caribbean Oils & Minerals, Ltd. at December 31, 2002 and 2001, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2002 and for the period from January 31,
1953 (inception) to December 31, 2002 in conformity with accounting principles
generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully described in
Notes 1 and 4 to the consolidated financial statements, the Company has a
working capital deficiency, has incurred recurring losses and has a deficit
accumulated during the development stage. In addition, the Company has been and
continues to be involved in several legal proceedings against the State of
Florida which have limited the Company's ability to commence development
activities on its unproved oil or gas properties or obtain compensation for
certain property rights it believes have been confiscated. These situations
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or amounts and classification of liabilities that may result from the
outcome of these uncertainties.
/s/ Ernst & Young LLP
Stamford, Connecticut
February 12, 2003
33
COASTAL CARIBBEAN OILS & MINERALS, LTD.
(A Bermuda Corporation)
A Development Stage Company
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. dollars)
December 31,
-----------------------------
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 292,095 $ 609,024
Interest and accounts receivable 4,068 8,604
Notes receivable -- 15,000
Prepaid expenses 410,632 353,596
------------ ------------
Total current assets 706,795 986,224
------------ ------------
Unproved oil, gas and mineral properties
(full cost method) -- --
Contingent litigation claim (Note 4) -- --
Other assets -- 90,391
------------ ------------
Total assets $ 706,795 $ 1,076,615
============ ============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable 913,480 71,677
Accrued liabilities 1,605 162,730
Amounts due to related parties 621,618 124,214
------------ ------------
Total current liabilities 1,536,703 358,621
------------ ------------
Minority interests -- --
Shareholders' (deficit) equity:
Common stock, par value $.12 per share:
Authorized - 250,000,000 shares
Outstanding - 46,211,604 and 43,468,329
shares, respectively 5,545,392 5,216,199
Capital in excess of par value 32,067,811 31,497,362
------------ ------------
37,613,203 36,713,561
Deficit accumulated during the development stage
(38,443,111) (35,995,567)
------------ ------------
Total shareholders' (deficit) equity (829,908) 717,994
------------ ------------
Total liabilities and shareholders' equity $ 706,795 $ 1,076,615
============ ============
See accompanying notes.
34
COASTAL CARIBBEAN OILS & MINERALS, LTD.
(A Bermuda Corporation)
A Development Stage Company
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. Dollars)
For the
period from
Jan. 31, 1953
Years ended December 31, (inception)
---------------------------------------------- to
2002 2001 2000 Dec. 31, 2002
------------ ------------ ------------ -------------
(Restated)
INTEREST AND OTHER INCOME $ 7,357 $ 78,432 $ 62,544 $ 3,876,912
------------ ------------ ------------ ------------
EXPENSES:
Legal fees and costs 1,549,178 1,670,446 633,521 16,230,137
Administrative expenses 662,390 533,579 535,325 9,069,630
Salaries 151,800 151,800 151,800 3,524,228
Shareholder communications 32,286 105,863 107,852 3,917,781
Write off of unproved properties 59,247 4,201,733 -- 5,501,247
Exploration costs -- 480 19,598 247,465
Lawsuit judgments -- -- -- 1,941,916
Minority interests -- -- -- (632,974)
Other -- -- -- 364,865
Contractual services -- -- -- 2,155,728
------------ ------------ ------------ ------------
2,454,901 6,663,901 1,448,096 42,320,023
------------ ------------ ------------ ------------
NET LOSS $ (2,447,544) $ (6,585,469) $ (1,385,552)
============ ============ ============
Deficit accumulated during the
development stage $(38,443,111)
============
Net loss per share based on weighted
average number of shares outstanding
during the period:
Basic and diluted EPS $ (.05) $ (.15) $ (.03)
============ ============ ============
Weighted average number of shares
outstanding (basic and diluted) 44,734,456 43,468,329 40,843,736
============ ============ ============
See accompanying notes.
35
COASTAL CARIBBEAN OILS & MINERALS, LTD.
(A Bermuda Corporation)
A Development Stage Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. Dollars)
For the period from
Jan. 31, 1953
Years ended December 31, (inception)
-------------------------------------------- to
2002 2001 2000 Dec. 31, 2002
----------- ----------- ------------ -------------------
(Restated)
OPERATING ACTIVITIES:
Net loss $(2,447,544) $(6,585,469) $ (1,385,552) $(38,443,111)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest -- -- -- (632,974)
Write off of unproved properties -- 4,201,733 -- 5,501,247
Common stock issued for services -- -- -- 119,500
Compensation recognized for stock option grant -- -- 75,000 75,000
Recoveries from previously written off properties -- 252,173
Net change in:
Interest and accounts receivable 4,536 32,916 (15,937) (4,068)
Prepaid expenses (57,036) (29,699) 28,192 (410,632)
Accrued liabilities 1,178,082 165,445 124,752 1,536,703
Other assets 90,391, (62,525) (421) --
----------- ----------- ------------ ------------
Net cash used in operating activities (1,231,571) (2,277,599) (1,173,966) (32,006,162)
----------- ----------- ------------ ------------
INVESTING ACTIVITIES:
Additions to oil, gas, and mineral properties
net of assets acquired for common stock and
reimbursements -- (57,051) (48,190) (3,621,688)
Proceeds from relinquishment of surface rights -- -- -- 246,733
Marketable securities (net) -- -- 390,941 --
Notes receivable 15,000 (15,000) -- --
Purchase of fixed assets -- -- (61,649)
----------- ----------- ------------ ------------
Net cash provided by (used in) investing activities 15,000 (72,051) 342,751 (3,436,604)
----------- ----------- ------------ ------------
FINANCING ACTIVITIES:
Sale of common stock, net of expenses 899,642 -- 3,138,765 30,380,612
Shares issued upon exercise of options -- -- -- 884,249
Sale of shares by subsidiary -- -- -- 750,000
Sale of subsidiary shares 3,720,000
----------- ----------- ------------ ------------
Net cash provided by financing activities 899,642 3,138,765 35,734,861
----------- ----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents (316,929) (2,349,650) 2,307,550 292,095
Cash and cash equivalents at beginning of period 609,024 2,958,674 651,124 --
----------- ----------- ------------ ------------
Cash and cash equivalents at end of period $ 292,095 $ 609,024 $ 2,958,674 $ 292,095
=========== =========== ============ ============
See accompanying notes.
36
COASTAL CARIBBEAN OILS & MINERALS, LTD.
(A Bermuda Corporation)
A Development Stage Company
CONSOLIDATED STATEMENT OF COMMON STOCK
AND CAPITAL IN EXCESS OF PAR VALUE
(Expressed in U.S. dollars)
For the period from January 31, 1953 (inception) to December 31, 2002
Capital in
Number of Common Excess
Shares Stock of Par Value
---------- ---------- ------------
Shares issued for net assets and unrecovered costs
at inception 5,790,210 $ 579,021 $ 1,542,868
Sales of common stock 26,829,486 3,224,014 16,818,844
Shares issued upon exercise of stock options 510,000 59,739 799,760
Market value ($2.375 per share) of shares issued in
1953 to acquire an investment 54,538 5,454 124,074
Shares issued in 1953 in exchange for 1/3rd of a 1/60th
overriding royalty (sold in prior year) in nonproducing
Leases of Coastal Petroleum 84,210 8,421 --
Market value of shares issued for services rendered
During the period 1954-1966 95,188 9,673 109,827
Net transfers to restate the par value of common stock
outstanding in 1962 and 1970 to $0.12 per share -- 117,314 (117,314)
Increase in Company's investment (equity) due to
capital transactions of Coastal Petroleum in 1976 -- -- 117,025
---------- ---------- ------------
Balance at December 31, 1990 33,363,632 4,003,636 19,395,084
Sale of subsidiary shares -- -- 300,000
---------- ---------- ------------
Balance at December 31, 1991 33,363,632 4,003,636 19,695,084
Sale of subsidiary shares -- -- 390,000
---------- ---------- ------------
Balance at December 31, 1992 33,363,632 4,003,636 20,085,084
Sale of subsidiary shares -- -- 1,080,000
---------- ---------- ------------
Balance at December 31, 1993 33,363,632 4,003,636 21,165,084
Sale of subsidiary shares -- -- 630,000
---------- ---------- ------------
Balance at December 31, 1994 33,363,632 4,003,636 21,795,084
Sale of subsidiary shares -- -- 600,000
---------- ---------- ------------
Balance at December 31, 1995 33,363,632 4,003,636 22,395,084
Sale of common stock 6,672,726 800,727 5,555,599
Sale of subsidiary shares -- -- 480,000
Exercise of stock options 10,000 1,200 12,300
---------- ---------- ------------
Balance at December 31, 1996 40,046,358 4,805,563 28,442,983
Sale of subsidiary shares -- -- 240,000
Exercise of stock options 10,000 1,200 10,050
---------- ---------- ------------
Balance at December 31, 1997,1998 and 1999 40,056,358 4,806,763 28,693,033
Sale of common stock 3,411,971 409,436 2,729,329
Compensation recognized for stock option grant -- -- 75,000
---------- ---------- ------------
Balance at December 31, 2000 and 2001 43,468,329 5,216,199 31,497,362
Sale of common stock 2,743,275 329,193 570,449
---------- ---------- ------------
Balance as of December 31, 2002 46,211,604 $5,545,392 $ 32,067,811
========== ========== ============
See accompanying notes.
37
COASTAL CARIBBEAN OILS & MINERALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying consolidated financial statements include the accounts
of Coastal Caribbean Oils & Minerals, Ltd., a Bermuda corporation (Coastal
Caribbean) and its majority owned subsidiary, Coastal Petroleum Company (Coastal
Petroleum), referred to collectively as the Company. The Company, which has been
engaged in a single industry and segment, is considered to be a development
stage company since its exploration for oil, gas and minerals has not yielded
any significant revenue or reserves. All intercompany transactions have been
eliminated. Certain prior year amounts have been reclassified to conform with
the current year presentation.
Cash and cash equivalents
The Company considers all highly liquid short-term investments with
maturities of three months or less at the date of acquisition to be cash
equivalents. Cash and cash equivalents are carried at cost which approximates
market value. The components of cash and cash equivalents are as follows:
December 31,
--------------------
2002 2001
-------- --------
Cash $ 92,777 $111,682
Marketable securities 199,318 497,342
-------- --------
$292,095 $609,024
======== ========
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. The outcome of the litigation
and the ability to develop the Company's oil and gas properties will have a
significant effect on the Company's financial position and results of
operations. Actual results could differ from those estimates.
Unproved Oil, Gas and Mineral Properties
The Company follows the full cost method of accounting for its oil and
gas properties. All costs associated with property acquisition, exploration and
development activities whether successful or unsuccessful are capitalized.
38
COASTAL CARIBBEAN OILS & MINERALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Since the Company's properties were undeveloped and nonproducing and the subject
of litigation, capitalized costs were not being amortized, however, as more
fully described in Note 3, these costs were written off in 2001.
The capitalized costs are subject to a ceiling test which basically
limits such costs to the aggregate of the estimated present value discounted at
a 10% rate of future net revenues from proved reserves, based on current
economic and operating conditions, plus the lower of cost or fair market value
of unproved properties.
The Company assesses whether its unproved properties are impaired on a
periodic basis. This assessment is based upon work completed on the properties
to date, the expiration date of its leases and technical data from the
properties and adjacent areas. These properties are subject to extensive
litigation with the State of Florida.
During the year 2001, the Company concluded that its leases had been
taken and its property interests were impaired by the actions taken by the State
of Florida and therefore, had recorded an impairment charge to reflect the write
off of the costs of unproved oil, gas and minerals properties. See Note 4.
Litigation. All costs incurred in 2002 in connection with the Company's Florida
leases have been expensed as incurred (as will be all future costs).
Sale of Subsidiary Shares
All amounts realized from the sale of Coastal Petroleum shares have been
credited to capital in excess of par value.
Loss Per Share
Loss per common share is based upon the weighted average number of
common and common equivalent shares outstanding during the period. The Company's
basic and diluted calculations of EPS are the same because the exercise of
options is not assumed in calculating diluted EPS, as the result would be
anti-dilutive (the Company has continuing losses).
Financial instruments
The carrying value for cash and cash equivalents, accounts receivable,
and accounts payable approximates fair value based on anticipated cash flows and
current market conditions.
39
COASTAL CARIBBEAN OILS & MINERALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Stock Options
The Company adopted the disclosure provisions of Statement of Financial
Accounting Standards (SFAS or Statement) No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure", which amends SFAS No. 123,
"Accounting for Stock-Based Compensation", in 2002. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation, which was originally
provided under SFAS No. 123. The Statement also improves the timeliness of
disclosures by requiring the information to be included in interim as well as
annual financial statements. The adoption of these disclosure provisions had no
impact on the Company's 2002 consolidated results of operations, financial
position or cash flows.
At December 31, 2002, the Company maintains one stock-based employee
compensation plan (see note 6, Stock Option Plan). The Company accounts for the
employee stock compensation plan in accordance with the intrinsic value-based
method prescribed by Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. No stock-based employee compensation expense is
reflected in net loss as all options granted under the plans have an exercise
price equal to the fair market value of the underlying common stock on the date
of grant.
Consistent with the method described in SFAS No. 123, if compensation
expense for the Company's plan had been determined based on the fair value at
the grant dates for awards under its plan, net loss and net loss per share would
have been increased to the proforma amount indicated below. For the purposes of
pro forma disclosures, the estimated fair value of the stock options is expensed
in the year of grant since the options are immediately exercisable. The
Company's pro forma information follows:
Amount Per Share
------------ ---------
Net loss as reported - December 31, 2000 $(1,385,522) $(.03)
Stock option expense (450,000)